IMF Note on Global Economic Prospects and Policy Changes

About the Executive Summary

The Following executive summary is from a note by the Staff of the IMF prepared for the January 19-20, 2012 meeting of the Group of Twenty Deputies in Mexico City.Read the Full text

Executive Summary

The global recovery is being threatened by intensified sovereign, financial, and real sector feedback loops.
Activity will lose steam through 2012, but a collapse should be avoided. In G-20 advanced economies, the euro area
will experience a mild recession through 2012. In the United States, growth is expected to moderate following the
recent pick-up, which was supported in part by lower household saving. Other major advanced economies will
suffer from weak and uneven growth. In G-20 emerging economies, the moderation in growth from high levels is
expected to continue in 2012, reflecting past policy tightening and adverse spillovers from advanced economies.

Downside risks to global growth have escalated. The overarching risk remains an intensified "paradox of thrift" as households, firms, and governments globally reduce demand. The prospect of multiple equilibria—particularly with
respect to market perceptions of sovereign debt sustainability in the euro area—has intensified this risk. Other key
risks include hard landings in emerging economies and a sharply higher oil price, driven by geopolitical-related
disruptions to the supply of crude oil.

Europe must pursue its move beyond its piecemeal approach and achieve a successful resolution of the crisis
through four key steps. Fiscal consolidation structured and paced to avoid a collapse in demand, with the focus on
the size of the cyclically-adjusted effort; countries with policy space should consider holding off adjustment in 2012.
Stronger growth, by offsetting the adverse effect of fiscal consolidation on growth with other policies: easier
monetary policy, including lower ECB policy rates; bank recapitalization; and structural reforms to address the root
causes of the crisis and bolster market confidence. Enhanced crisis management, by providing sufficient funding
through expanded use of the ECB’s balance sheet and adding real resources for the European Financial Stability
Facility (EFSF) and the European Stability Mechanism (ESM). Deeper fiscal and financial integration across Europe to
underpin the sustainability of the common currency.

In other G-20 advanced economies, there remains an urgent priority to set out a credible path for fiscal
consolidation over the medium term. In the near term, sufficient adjustment is planned in most advanced
economies. If downside risks to growth materialize, countries with adequate space should allow automatic
stabilizers to operate fully, and those that can afford it, may consider slowing the pace of near-term consolidation,
while maintaining their commitment to credible medium-term consolidation. Monetary policy should remain highly
accommodative, and policymakers should stand ready to continue or expand unconventional measures, if needed.

In G-20 emerging economies, the immediate policy priority is to ensure a soft landing as domestic growth
and demand from advanced economies moderate. Monetary policies can be eased in economies with
diminishing inflationary pressure (e.g., Latin America), but with sufficient safeguards to insure against overheating in
some sectors (e.g., real estate). Social spending can be increased in economies where inflation is low, public debt is
not high, and external surpluses are large (e.g., China). Policy space is more limited in those economies that suffer
from both relatively high inflation and public debt, warranting a more cautious stance toward policy easing (e.g.,
India).

Collective action to address persistent global imbalances can better guarantee a return to strong,
sustainable, and balanced global growth. This will require further deleveraging of households in advanced deficit
economies and more inclusive growth and lower saving in emerging surplus economies. The latter can be achieved
by alleviating distortions, notably financial sector reform as well as enhanced pension, healthcare, and education
systems, complemented with less intervention in foreign exchange markets.